02 KWCh_02_Using_Models

02 KWCh_02_Using_Models - chapter 2 Economic Models: >...

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>> Economic Models: Trade-offs and Trade Section 2: Using Models chapter 2 Economics, we have now learned, is mainly a matter of creating models that draw on a set of basic principles but add some more specific assumptions that allow the mod- eler to apply those principles to a particular situation. But what do economists actu- ally do with their models? Positive versus Normative Economics Imagine that you are an economic adviser to the governor of your state. What kinds of questions might the governor ask you to answer? Well, here are three possible questions: 1. How much revenue will the tolls on the state turnpike yield next year? 2. How much would that revenue increase if the toll were raised from $1 to $1.50? 3. Should the toll be raised, bearing in mind that a toll increase will reduce traffic and air pollution near the road but will impose some financial hardship on fre- quent commuters?
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There is a big difference between the first two questions and the third one. The first two are questions about facts. Your forecast of next year’s toll collection will be proved right or wrong when the numbers actually come in. Your estimate of the impact of a change in the toll is a little harder to check—revenue depends on other factors besides the toll, and it may be hard to disentangle the causes of any change in revenue. Still, in principle there is only one right answer. But the question of whether tolls should be raised may not have a “right” answer— two people who agree on the effects of a higher toll could still disagree about whether raising the toll is a good idea. For example, someone who lives near the turnpike but doesn’t commute on it will care a lot about noise and air pollution but not so much about commuting costs. A regular commuter who doesn’t live near the turnpike will have the opposite priorities. This example highlights a key distinction between two roles of economic analysis. Analysis that tries to answer questions about the way the world works, which have def- inite right and wrong answers, is known as positive economics . In contrast, analysis that involves saying how the world should work is known as normative economics . To put it another way, positive economics is about description, normative economics
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This note was uploaded on 04/10/2008 for the course ECON 201 taught by Professor Zimmerman during the Spring '08 term at SD State.

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02 KWCh_02_Using_Models - chapter 2 Economic Models: >...

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